Rosy Outlook

The BDI industry federation also upgraded its growth forecast for the current year to 2.5 percent from 2.0 percent previously, even if federation chief Jürgen Thumann warned the government not to become complacent.

The prospect of faster growth in Germany is likely to strengthen the European Central Bank's arguments for further monetary tightening in the entire 13-country euro zone, analysts said.

In an interview published in the daily Frankfurter Allgemeine Zeitung on Monday, Bundesbank chief Weber said the recent slew of favorable economic news coming from Germany was only the beginning, hinting that the central bank might upgrade its growth forecast for the current year.

"The entry into the first quarter was very favorable, so there is a possibility that we will upgrade our forecast," said Weber, who as head of the German central bank sits on the ECB's policy-setting governing council.

Warnings about complacency

BDI chief Thumann told a news conference in Hanover said the current robust growth would make itself felt on the labor market where unemployment could feasibly fall below 3.5 million.

But the government must not rest on its laurels, Thumann said, urging the ruling left-right coalition to press ahead with decisive structural reforms.

"With the global economy set to expand by 5.0 percent, 2.5 percent growth for Germany is not much," Thumann said. "A lot remains to be done."

Later this week, Germany's leading economic institutes also look set to raise their own growth forecasts, too.

Faster growth coupled with accelerating inflation will provide additional ammunition for the ECB to raise euro-zone borrowing costs -- already at a five-and-a-year high -- again later this year to prevent the economy from overheating.

ECB chief Jean-Claude Trichet sent clear signals last week that, with the current upturn set to continue, the guardian of the euro will notch up its benchmark "refi" refinancing rate to 4.0 percent in June.

Only the beginning?

The government, too, is becoming increasingly optimistic, with Economy Minister Michael Glos suggesting recently that Berlin might raise its 2007 growth forecast from 1.7 percent to at least 2.0 percent.

"There are some indications that Germany is still only at the beginning of an upturn that looks set to continue in the coming years," Weber said.

The euro zone's biggest economy was in a traditional cyclical upturn, with the strong export performance of past years now feeding through to investment, the central bank chief said.

"At the end of last year, companies said they were investing to increase capacity," he said.

And private consumption could similarly start contributing to growth from the middle of the year, as well, Weber continued.

VAT effect

That should be the case once the so-called VAT effect had faded, he argued, referring to a three-percentage-point increase in value-added or sales tax (VAT), which came into effect at the start of this year and which persuaded consumers to bring forward big-ticket purchases to the end of 2006.

Recent rises in oil prices had been almost wholly offset by the rise in the value of the euro against the dollar, limiting the negative economic effects, Weber said. And the economic slowdown in the United States would not harm German exports, too much, given the growing importance of dynamic economies such as China and Arab states, he argued.

In their widely watched spring report, to be published on Thursday, the country's leading economic research institutes are widely expected to raise their forecasts for German growth this year and next year.

Newspaper reports have said that five of the six think-tanks -- Ifo in Munich, DIW in Berlin, HWWA in Hamburg, IfW in Kiel, IWH in Halle and RWI in Essen -- were pencilling 2.5-percent growth for the German economy both in 2007 and 2008. In their report last autumn, the institutes had forecast growth of 1.4 percent for 2007.